Cryptocurrency regulators rush to make first major rules
WASHINGTON – After years of largely standing apart as cryptocurrencies grew from a digital curiosity a volatile but widely adopted innovation, Federal regulators are racing to address potential risks to consumers and financial markets.
Their concerns have only grown as firms, both new and established, race to find ways to profit from bringing large amounts of money held in cryptocurrency into the traditional financial system through interest-bearing accounts and quasi-banking services such as lending.
Now the Treasury Department and other agencies are moving urgently on an initial target for tighter regulation: a rapidly growing product called a stablecoin.
Issued by various firms that are currently only lightly regulated through a patchwork of state regulations, stablecoins serve as a bridge between cryptocurrency markets and the traditional economy.
The value of a stablecoin is pegged one-to-one to the United States dollar, gold or any other stable asset. The idea is to make it easier for people holding cryptocurrency – which is notorious for its frequent price fluctuations – to conduct transactions such as the purchase of goods and services, or to earn interest on their crypto holdings.
The use of stablecoins is growing rapidly, and regulators are increasingly concerned that they are not truly stable, and could lead to banks in the digital age. This year, dollar-denominated stablecoins such as Tether Token, USD Coin and Pax Dollar have grown from $30 billion in circulation in January to nearly $125 billion by mid-September.
“It is important for agencies to act quickly to ensure that there is an appropriate US regulatory framework in place,” Nelly Liang, an undersecretary of the Treasury, said in a statement.
The push by the Biden administration to exercise some control over stablecoins is likely to lead to a more widespread debate over the government’s role in regulating cryptocurrencies – a topic that has generated growing concern in Washington.
“I have closely watched a fool’s gold rush in the lead-up to the 2008 financial crisis,” Michael Hsu, the currency’s acting comptroller, commented on Tuesday. “It looks like we may be on top of the other with cryptocurrencies.”
Largely known as a vehicle for speculation, cryptocurrency is rapidly beginning to replace banking and finance and discussions are raging on whether governments need to augment or eventually replace their traditional currencies. Must issue own digital currency.
At a time when the total value of outstanding crypto tokens such as bitcoin is around $2 trillion – roughly the same value in circulation across all of the United States, stablecoins now underscore the growing share of cryptocurrency transactions globally.
The regulatory push has generated a wave of lobbying by cryptocurrency authorities. He has lined up in a series of virtual and in-person meetings with banking and financial regulators in recent weeks, seeking to shape the new rules while largely acknowledging that some form of federal oversight is now mandatory. .
Regulators are concerned about whether stablecoin firms have enough liquid assets to support the value of the currency they issue.
For example, in addition to cash and short-term Treasury bonds – which are considered safe and easy to redeem – issuers of the stablecoins USDT and USDC also have, at least until recently, reserve assets such as unsecured debt in corporations, which pose a lot of risk. It’s full and hard to convert to cash fast, especially in times of financial turmoil. That “commercial paper” is associated with other major parts of the financial system.
Treasury Department officials also want assurance that stablecoin firms have the technical ability to handle large surges in transactions so that they don’t set off a chain reaction of trouble if a large number of customers try to cash out their holdings. Huh.
Problems have already arisen. Solana Blockchain, a relatively new network that said it “ExplodingThe number of stablecoin transactions, faced a 17-hour halt on 14 September. blame the company “Resource constraints in the network” that prevented or slowed customers from buying or selling during the crash.
Federal officials interviewed said they were considering using the broadened powers created under the Dodd-Frank law, created after the 2008 financial crisis, to launch a review and announce potential. Stablecoins are “systemically important”, a finding that could subject them to tighter federal regulation.
“Regulators really start to pay more attention when the risks to society become greater,” said Circle chief executive Jeremy D. Allair, a payments and digital currency company that helped create the USD coin. “You naturally see that regulators want to come up with ways to address those risks.”
The USD coin is up almost 750 percent this year, and has about $30 billion in circulation. It is projected to reach over $200 billion by the end of 2023 at its current growth rate, Mr. Allaire said.
The first step the Treasury Department is likely to take would be to release a report with recommendations this fall. In interviews, industry executives, lobbyists and regulators offered a framework for what they hope to include in these recommendations, which will form a blueprint for potentially drafting regulations in the coming year.
The rules, he said, would potentially mandate that reserves are always liquid enough to meet redemption demands, and that the software that handles these transactions is robust enough to avoid system crashes and severe downturns when a massive one Transactions have to be dealt with.
He predicted that there would also be requirements around the process of creating a new stablecoin, a security system to protect privacy and data and consumer protection measures. Separately, the Treasury Department is preparing to introduce regulations aimed at preventing cryptocurrency from being used in illegal activities such as money laundering and tax evasion.
Some steps have already been taken to crack down on the sector.
USDT is the world’s most popular stablecoin issued by Hong Kong-based Tether; It currently represents more than half of the global stablecoin supply. In 2019 New York state regulators opened a fraud investigation into Tether, an investigation that was settled this year with a settlement that barred the company from doing business with customers in New York and asked it to regularly report it. The order was given as to what type of reserve asset backs its stablecoin.
Circle has already announced plans to voluntarily transfer its reserves to more liquid assets as of this month.
The new rules will create winners and losers, with some industry players better positioned to embrace them than others, who may have to change their business models to get in line.
Stablecoin issuer Paxos, for example, supports the move to regulate stablecoins. But it opposes the use of powers created under the Dodd-Frank Act of 2010 that allows an entity called the Financial Stability Oversight Council – made up of the Treasury Secretary, Federal Reserve Chairman and 13 other top federal and state financial regulators and financial experts – to effectively increase their access to stablecoins by declaring stablecoin activity or companies as “systemically important”.
But its chief executive in the circle said he had no objection to the post.
“At the time they would have that systemic designation, a largely full reserve, asset-backed dollar stablecoin that could be used across the Internet,” said Circle’s Mr. Allaire.
Another option would be to create some kind of new banking charter for stablecoin issuers that addresses a number of regulatory concerns.
The Securities and Exchange Commission can also use its powers to demand that certain stablecoin issuers backed by securities – such as commercial paper, bonds or money market funds – be registered as securities, requiring companies to provide investors with more money. Disclosures will need to be provided.
As SEC Chairman Gary Gensler pointed out, the agency did the same thing in 2016 with the mutual fund industry, which collapsed after a major fund reliant on risky debt and halted client withdrawals. Cryptocurrencies, he told the Senate Banking Committee, demanded similar action.
“Frankly, at this point in time, it is more like the Wild West or ‘buyer beware’ old world that existed before securities laws came into force,” Mr. Gensler testified.
In an effort to prevent emerging regulations from inhibiting industry growth, industry officials are expected to present their case to cabinet secretaries, Federal Reserve governors, key White House staff and congressional leaders on the Senate Banking and House Financial Services Committees. are striving for. , as well as financial regulators.
And crypto businesses and trade groups are increasingly hiring lobbyists and former regulators in Washington to act on their behalf.
Representatives from companies and industry groups that recently met with Treasury Department officials include top stablecoin issuers such as Tether, Circle and Paxos; Cryptocurrency exchanges that are also stablecoin makers such as Coinbase and Gemini; and old and new school financial services companies such as BlockFi, MasterCard and the Blockchain Association.
Industry executives argued in these sessions that cryptocurrency, relying on stablecoins, would help expand banking and payment services globally to the billions of people who now have limited access to the financial system.
Stable coins, he says, are integral to this vision. Ahead of the recent adoption of bitcoin as legal tender by the Central American nation, this is the picture US officials painted for El Salvadoran officials and crypto fans around the world.
If regulators severely restrict the growth of crypto through stringent new regulations, industry executives say, the US will drive innovation overseas, risk the primacy of the dollar and kill the promise of digital finance.
“If we think about the 20th century, first you had major innovations like aviation or the automobile,” said Tomica Tillman, a former Senate aide to President Biden who now works for venture capital firm Andreessen Horowitz, a Major crypto investor. . “And then you have the investment in the regulatory framework that helps bring the benefits of those technologies to a larger number of people.”
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